The political economy of social security

Abstract

We consider a two-period overlapping generations model in which individual voters differ by age and by productivity. In such a setting, a redistributive pay-as-you-go system is politically sustainable, even when the interest rate is higher than the rate of population growth. The workers with medium wages (not those with the lowest wages) and the retirees form a majority which votes for a positive level of social security. This level depends on the difference between the rates of population growth and interest as well as on the redistributiveness of the benefit rule.